Description: Trade credit insurance, business credit insurance or export credit insurance is a financial risk management product and insurance product available from private insurance providers and government agencies. This product is a derivative of the existing policies of the insurer with respect to trade credit risk. It is a specialized form of risk management covering risks such as accounts receivable, accounts payable, accrued expenses, and miscellaneous charges. Exports, imports, credits, and payments are covered in this kind of insurance. In order to get an accurate picture of the true costs involved, it is advisable to obtain a quote for the same from different insurance providers.
This insurance covers trade credit risk on the balance sheet of an organization. It is used to reduce the effect of un-liquidated accounts receivable on the balance sheet. It is also used to take care of the risk associated with accounts payable. This is the product of an all-cash arrangement and involves a discount rate equal to the cost of trading cash on hand at the prevailing rate at the time for the payment of premium.
There are two types of trade credit insurance export credit insurance and export credit insurance. The former covers risks resulting from delayed payment, which may result from un-coordinated shipments, and is often utilized to cover shipments which have been damaged, diverted, or delivered with defects. On the other hand, the latter type of insurance covers risks resulting from protracted default, which can be due to a variety of reasons. Imported goods may fail to gain acceptance in the domestic market, which results in the loss of a contract.
Exporters are highly exposed to political risk. The political risk that they face in exporting goods which have not been cleared through the channels of political authority is high. This is because trade credit risk is not based only on exporters' failure to deliver the goods on time. Rather, it incorporates failure to comply with export control measures and other policies, such as anti-piracy laws. It also takes into account political or trade policy issues like quotas and restrictions.
In cases where trade credit insurance has been applied, companies may face the risk of having their accounts receivable waved, which means that after a certain period of time, they would have to pay back the balance of the accounts receivable. This would adversely affect the business's cash flow. Accounts receivable insurance acts as a safety net for a company when faced with situations like these. Thus, it helps prevent prolonged default conditions.
These days, most business houses, both large and small, are finding it necessary to take up a proper business credit insurance. This type of insurance will help a company to overcome the risks related to its export and import business. With this, they will be able to enjoy the benefits of trade credit facilities as well as smooth working of accounts receivable as well as trade credit facilities. In short, business credit insurance helps businesses gain trade and accounts receivable facilities without . . . . . . suffering any kind of credit risk.